Beyond Compensation - Is It All Just Money? Retention Strategies for Today's Environment in Asia

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1 Beyond Compensation - Is It All Just Money? Retention Strategies for Today's Environment in Asia Richard Payne, Aon Consulting Asia Pacific Marie Brinkman, Radford Can high-performing staff be retained with good salary, excellent benefits and the prospect of a sizeable bonus? Can voluntary turnover be combated with compensation alone? A common refrain in emerging Asia is that we need to raise salaries to stem high turnover and attract the best talent. For many companies, the focus of retention strategies (indeed, in many cases the only strategy) has been to ensure that compensation is competitive to the market and highly attractive to potential candidates. Many organizations have found that relying on compensation alone to stem staff turnover simply does not work and is too costly. Asia s new business environment requires a more holistic approach to retaining high performing staff. Strategies for attraction and retention of high performers must start with a well-built compensation foundation and an emphasis on developing total leaders and mutual commitment. How Employers See It Recently, employers in many parts of Asia have been squeezed in a vise between the needs of the business and the demands of employees. Slower economic growth, investor pessimism, skyrocketing costs, price competition and skills shortages are making companies increasingly wary of acquiescing to employee demands. While Asian economic growth rates remain relatively high, a spinoff from the economic slowdown in the US is damaging confidence in Asia and leading companies to become more concerned about cost control. The loss of confidence has lead to a sharp decline in stock prices across the region. The Shanghai market, for example, is down 54% for the first eight months of the year as compared to a drop of only 11% in the US during the same period. Asian currency exchange rate appreciation has further exacerbated the cost pressures. Measured against the US dollar, the Chinese renminbi went up 6.4% in 2007 followed by an appreciation on 6% in the first eight months of The Indian rupee and Singapore dollar have experienced increases as well. As Asian exports to the US are usually priced in dollars, the rising exchange rates mean that, in local currency terms, costs are rising due to commodity price inflation while revenues are declining as their dollars buy less RMB, rupees and Singapore dollars. 1 Meanwhile, persistent shortages of skills and experience are threatening efficiency and quality of output for many Asian manufacturers and service firms. The hardest hit are those countries that have achieved the highest economic growth. A study by McKinsey Global Institute forecasts that China will need 75,000 business leaders in the next 10 years but that it currently has only 3,000-5,000 business leaders. In 2005, it was estimated that China needed 300,000 accountants just to fill existing requirements 2. Even where China has ample supply, the poor quality of education significantly reduces the pool. McKinsey estimates that China has 1.6 million young engineers but only 160,000 are suitable for employment by 1 Oanda.com, the currency site 2 Wild, Damian. China facing a skills shortage. Accountancy Age 23 June 2005: N. pag. 2 Sept <

2 Page 2 MNCs. 3 Foreign education is not much of a solution over one million Chinese went to study overseas between 1978 and 2006, but 70% did not go back home, according to The Guardian. 4 The issue of skills shortages is not exclusive to China. In India, skills shortages are beginning to take their toll. Shortfalls of IT professionals are projected to reach 500,000 by 2010 but new graduates are unlikely to fill the gap. Only 25% of new technical graduates are deemed suitable for employment. Despite graduating three million students from universities annually, a large proportion of these graduates are deemed unemployable or with skills deprivation. The bottom line for employers across Asia is the necessity of keeping a lid on controllable costs. Unavoidable increased costs must be accompanied by higher productivity and greater value creation. In order to prepare for the revival of higher growth as well as sustain current operations, they also need to secure and retain highly qualified and highperforming staff. How Employees See It Employees throughout much of Asia, have a different perspective, generally feeling that jobs are readily available. According to a recent global survey of job prospects by AC Nielsen, 5 seven out of the 10 most optimistic countries were in Asia. 6 Job seekers in India were especially optimistic with 26% saying their prospects were excellent while another 60% saying that prospects were good. While jobs are plentiful, inflation is dampening the mood of many consumers. Salary increases throughout Southeast Asia have failed to keep pace with inflation. Even in China, real salary increases 7 are expected to inch up by only 1.2% in Despite the thought shared by many HR professionals that compensation is the number one reason that employees leave their jobs, a survey by Manpower China listed 9 career development opportunities and advancement opportunities as the two top reasons cited by candidates for leaving an employer. This was followed by better compensation and benefits packages. A similar pattern appears in the traits that candidates are seeking from employers. Career development opportunities was listed as the top attribute, followed by better compensation, advancement opportunities and quality of leadership and management. 3 Farrell, Diana. Don t Be Afraid of Offshoring. BusinessWeek 22 Mar. 2006: N. pag. 2 Sept < 4 Watts, Jonathan. China fears brain drain as its overseas students stay put. The Guardian 2 June 2007: N. pag. Date Accessed(2 Sept. 2008) < 5 Consumer Confidence, Concerns, Spending and Attitudes to Recession, A global Nielsen consumer report, AC Nielsen, June The 10 most optimistic perceptions of local job prospects over the next 12 months were Norway, India, Denmark, Australia, Indonesia, Hong Kong, UAE, Vietnam, Switzerland and Singapore. Some Asian countries were also among the 10 most pessimistic: Japan (second most pessimistic), South Korea (fourth) and Thailand (seventh). 7 Average salary increase minus the increase in consumer prices 8 Asia Pacific Executive Brief, August 2008, International Market Assessment Asia Pty Ltd and Radford International Semiannual Summary of Industry Trends Survey, April China Employee Engagement and Retention Survey, Manpower China Research Report, July, 2006

3 Page 3 The AC Nielsen Survey indicated that more than in any other place in the world, employees in Asia/Pacific noted work/life balance as their biggest concern. 10 China tops the list worldwide with 42% of respondents indicating it is their biggest or second biggest concern. Five Southeast Asian countries 11 plus China and Taiwan accounted for seven out of the 10 top countries worldwide, with the greatest concern being work/life balance. The bottom line for employees is that they are looking for something more than compensation. Stimulating jobs and promotion opportunities top their lists, as well as enlightened leadership and an excellent work environment. Perhaps the most important point, is that if they don t get it with their current employer, they can easily go elsewhere because promising job opportunities are available. So, how do we address this situation? Employer and employee concerns appear to be at odds. Employers need to control costs, increase productivity and secure and retain a talented workforce while employees expect a continuously improving standard of living, promotion and a better work/life balance. Relying on high salaries alone as a retention tool has historically been ineffective and can cause a spiraling rise in pay without necessarily any improvement in productivity. Furthermore, it is clear that compensation alone is not the answer to retention. Training programs can also prove to be ineffective since the impact on retention is usually short-lived and marginal, if it does not address corporate priorities. What Does Work Going Beyond Compensation The solution to this conundrum lies in identifying and addressing both employer and employee concerns and priorities. Companies must find a way to keep a lid on costs and link pay to value creation while at the same time addressing the demands of employees for a rising standard of living, more opportunities and a better work environment. First things first the Compensation foundation In the words of a wise former colleague, Money is not everything, but it is the first thing. If companies do not have a strong compensation foundation, all efforts at retention are meaningless. But, a strong compensation foundation does not necessarily mean above market compensation or salary increases that are linked solely to inflation and market movement. Rather, the compensation foundation should consist of four key elements: 1. A salary range and a benefits package that is broadly competitive for the position 2. Actual salaries that reflect a person s capabilities to do the job and personal development and growth 3. Bonus and short-term incentive that reflect individual and corporate performance 4. Long-term incentives (paid out over time) that rewards consistent and repeated high performance Salary range and benefits package. A company s capacity to pay and philosophy of pay defines the parameters of a competitive salary range and benefits package. A survey of the market simply provides a reality check to ensure that the policies are roughly aligned with market conditions % of respondents in Asia/Pacific cited it as their biggest or second biggest concern compared with 30% in Latin America, 20% in Europe and 16% in North America. 11 Vietnam (41%), Indonesia 38%), Philippines (38%), Singapore (38%) and Malaysia (37%)

4 Page 4 Actual salaries. Accurate competency assessment and consideration of a person s growth in the job are important factors in determining the actual salary. Linking fixed pay to capability is essential as it ensures that personal growth in line with corporate needs is encouraged and rewarded. Bonus and shortterm incentives. Variable pay linked to performance is a critical component of the package as it addresses both the need of the company to keep costs in line with value creation while at the same time providing the employee the opportunity for high compensation. This reinforces the company s business and people strategy by aligning rewards with company outcomes and employee performance. Longterm incentive. Long-term incentives such as deferred bonus, deferred stock in the form of restricted stock or stock options are an increasingly critical part of the pay package. Long-term incentives provide the opportunity for wealth creation to satisfy the future needs of the employee while at the same time ensuring the added cost is tied to retention and performance. A compensation package comprised of these four elements sets the foundation for retaining high-performing and highly competent staff; however, it only sets the stage and does not ensure attraction and retention. Now that compensation is fixed Once a compensation foundation is in place, companies need to focus on what really matters. In a recent survey by Insync 12, experienced professionals and managers (i.e. baby boomers ) rated their direct manager as the most important reason in their decision to leave their employer. Generation X and Y employees also rated their direct manager as very important in their decision. This is not surprising - jobs are abundant at comparable or higher pay so why put up with an incompetent, insensitive or weak boss? Concentrating on developing total leaders goes a long way to addressing both employee and employer concerns. An emphasis on leadership development increases an otherwise short supply and also has a highly positive impact on their retention and the retention of those that report to them. Leadership is not something that can be easily taught. Ad hoc workshops and retreats may provide a shortterm feel good and halo effects but are unlikely to lead to behavioral change or real improvement in the workplace environment. To make a real difference, an integrated and holistic approach to leadership development is essential. A work environment and HR policies that are aligned with and supportive of clearly defined mission, vision and values provides the basis for effective leadership development. Leadership development initiatives themselves should combine workshops with coaching and on-the-job projects. The emphasis should not be on general leadership attributes or one or another aspect of leadership. Instead, efforts to cultivate leadership should consider all aspects of a total leader. A total leader combines heart, hand, head and courage. Heart cultivating leaders who others want to follow. The emphasis here is on coaching, mentoring and communication. Hand - leaders who have strong management capabilities. The attributes that need to be developed are accountability for results, delegation and effective time management 12 Entry/Exit Survey, Insync Surveys,

5 Page 5 Head - leaders who employ their full intellectual capabilities. Strategic thinking, problem solving and decisionmaking are areas that need to be emphasized. Courage - leaders who have the self-confidence to enact positive change. Integrity, trust, team effort and determination are critical attributes of an effective leader. The next step is mutual commitment Starting with a firm foundation in compensation and adding on to a focus on cultivating total leaders will certainly improve staff retention. The next necessary step to ensure retention of high performing staff is the building of strong mutual commitment between employers and employees. First, the company must make a strong commitment to its employees. This means having clear values, strategy, roles, objectives and rewards and then creating a supportive environment that encourages and rewards performance and development. It also means demonstrating concern for the individual as a person. Developing relationships built on trust and empathy creates a strong bond among employees and between employees and their supervisors. Open communication helps to reinforce the trust and respect that develops out of those relationships. In return, the individual must commit to the company. To ensure mutual commitment, the individual must be expected to deliver the highest performance possible. Employees need to align behavior with the values of the organization and continuously develop themselves personally and professionally. If the company fails to commit to the individual, then the employee should leave the company. Likewise, if the individual fails to commit to the company, then the employee should be asked to leave. It is not just about money! Companies need to go beyond compensation if they expect to be competitive in Asia s tough new environment. Yes, compensation is the foundation; however, successful retention of high-performing staff is primarily the outcome of strong leadership and mutual commitment. Contact Richard Payne at mailto:rick_payne@aon-asia.com to learn more about how Aon Consulting can assist your organization with attraction and retention issues in Asia